Annuity Companies: Do they keep the money when you die?

The Annuity Man

A horrific stat that can never be calculated is the amount of people that needed an annuity contractual transfer of risk lifetime income stream, but never bought one because they thought the annuity company would keep the money when they passed away.

I blame the financial media, uneducated and agenda driven financial advisors, and the annuity industry itself.  How is it even possible for this common incorrect belief to have proliferated and survived for decades?  A simple, consistent advertising campaign by the annuity industry would solve it, but getting the carriers to agree on something like this is the purest definition of “hearding cats.”

To get to the end of this annuity movie and find out “who done it,” the answer to why the evil annuity company keeps the money when you die comes down to one thing.  There is only one answer.

If the annuity company keeps any unused money from your lifetime income stream when you die, then it’s your fault.  Yes...you!  You the annuity buyer is one to blame because that structuring decision is made at the time of application.

However, you can contractually make sure that 100% of any unused money will go to your listed beneficiaries on the policy even though the annuity company will pay regardless of how long you live.  In other words, the evil annuity company will not keep a penny under any circumstance.

Don’t believe me?...then keep reading so I can lay out the contractual facts for you.

Annuity 101

Annuity products (aka: annuity contracts) are issued by life insurance companies. Regardless of the type of annuity, these insurance products are risk transfer strategies that primarily solve for lifetime income.  One of the most well kept financial secrets of all time is the fact that annuities are the only product that guarantees a lifetime income stream.  Yes, annuities have a monopoly on lifetime income.  Every U.S. citizen with a Social Security number already owns the best inflation annuity on the planet.  That annuity structure is called Social Security.  If you work for a government entity, strong labor union, or a really generous private sector company, you own another annuity called a pension.  Yes, that’s an annuity as well.

Annuities were first introduced during the Roman Times as lifetime pension payments for the dutiful Roman soldiers and their families.  The Latin word for payment is “annua,” which is the origin of today’s word “annuity.”  That first Roman annuity type is today’s Single Premium Immediate Annuity (SPIA).  SPIAs have been sold in the United States for hundreds of years, and still provide the highest contractual guarantee for immediate income needs.

Buying an annuity for lifetime retirement income is like buying a plane ticket.  It’s a commodity product that has to be shopped with all carriers, using an objective annuity calculator, so you can find the highest contractual guarantee for your specific situation. These annuity quotes are like a gallon of milk, meaning that they expire every 7 to 10 days unless you lock that number in during the application process.

Annuity types that guarantee income for life are primarily priced on your life expectancy(s) at the time you start the payments.  Interest rates play a secondary role, and that lifetime income stream is a combination of return of principal plus interest.  If you live past your projected life expectancy, there might not be any money left in your account...but the annuity company is on the hook to pay.  That’s the unique benefit proposition that only annuities can provide.

With liftetime income, there’s no ROI (Return On Investment) calculation until you die.  Up until that point, your income annuity (i.e. life annuity) is a pure transfer of risk

“Life Only”

The ironic (and scary) part about the misinformation surrounding “the annuity company keeping the money when you die” concern is that there are only 3 types of annuities this could even apply to.  With the other types of annuities, this “fear” of losing your money to the annuity company does not apply.  Those types are Multi-Year Guarantee Annuities (MYGAs), Variable Annuities (VAs), and Fixed Index Annuities (FIAs).  When you die with MYGAs, VAs, and FIAs, whatever money is left in your annuity account goes in full to your listed beneficiaries on the policy.

The types of annuities where the policy could be structured so that the money “goes poof” when you Learjet hits the mountain are what’s called “annuitized” structures.  Annuitization means to create payments, and annuitized product types are Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), and Qualified Longevity Annuity Contracts (QLACs).

Think of annuitization like ripping the knob off of a water faucet.  The water is going to flow.  When you annuitize a policy for lifetime income, those payments are going to hit your bank account for as long as you live.  There’s no stopping that income stream.  You’re going to get paid!

At the time of application with annuitized products like SPIAs, DIAs, and QLACs you can decide on how that income stream is structured.  Depending on how you count, there are over 30 different income structuring choices.

“Life Only” is just one of those choices, but the one that people mistakenly think is the only choice.  “Life Only” means that if you die before your projected life expectancy, then the evil annuity company will keep any unused money.  Because you are shouldering some of that risk and not transferring all of it to the annuity company, the payments are higher for “Life Only” than the other structuring choices.  But once again, you don’t have to choose “Life Only.”  It’s your decision at the time of application.

If you structure the policy “Joint Life Only,” then the annuity company is on the hook to pay for 2 lives.  When the first “annuitant” dies, you can structure the income to continue uninterrupted and unchanged for the “surviving annuitant’s” life.  When that second person dies, then whatever money is left in the annuity account goes to the annuity company.

But just to reiterate, you DO NOT have to structure your lifetime income guarantee “Life Only.”  Your structuring choice is made at the time you fill out the application, and you would only choose “Life Only” if you just wanted the highest payments and legacy (i.e. leaving money to your family) is not a concern with this specific annuity asset.

Having Your Cake

Let’s set the record straight from the start, there is no “too good to be true” annuity product.  Annuities are contracts, and should only be purchased for their contractual guarantees.  Never buy an annuity for the hypothetical, theoretical, projected, back-tested, or hopeful agent return scenarios that are presented during the sales pitch.  Always own an annuity for what it WILL DO, not what it might do.

With that being said, when you are structuring your lifetime income annuity contract during the application process...you can choose the lifetime income guarantee and also make sure the annuity company never keeps a penny.  Even though they are on the hook to pay regardless of how long you live, the contract can stipulate that any unused money will go to your beneficiary(s) in a lump sum or in payment form.

“Life with Cash Refund” means that the income stream is guaranteed for life, regardless of how long that is.  The “Cash Refund” part of that contract means that when you die, whatever money is left in the account goes lump sum to the listed beneficiaries on the policy.

“Life with Installment Refund” means that the income stream is guaranteed for life, regardless of how long you live.  The “Installment Refund” portion of the contract means that when you pass away, whatever money is left in the account is paid in payment form (the same payment amount you were receiving) until the money is fully exhausted.

By the way “Installment Refund” has a higher payment than “Cash Refund” because you are allowing the annuity company to hold onto the money longer.  Makes logical sense if you think about it.

Just to pile on to this mis-informed “annuity company keeps the money” nonsense, you can also add a period certain backstop to the policy.  For example, “Life with 30 Year Period Certain” means that the annuity company is on the hook to pay you for life.  But if you die before those 30 years, that remaining amount will be paid in payment form to the listed beneficiaries.  So if you died in year 17, there would be 13 more years of payments (at the same dollar payment amount) going to the listed beneficiaries on the policy.  Got it?

Fake Annuity News

This is not political in any way, because I could care less about either party.  However, if there was ever an industry that has suffered from “fake news,” it’s the annuity industry.  Whether it’s commercials or internet ads telling you to “hate all annuities,” or your friend at the cocktail party ridiculously saying that “all annuities are expensive,” stop believing what you hear and do your own research.

Annuities are just like any other part of your portfolio and overall retirement planning. Before you put your hard earned retirement savings into any financial product, you have to take your time and make decisions on your terms.  There’s never an urgency to buy an annuity of any type, the only urgency is to fully understand the limitations and benefits of that specific contract.

So the next time you hear someone say that they would never buy an annuity because the evil annuity company keeps the money when they die...your easy answer and factual rebuttle is “that’s your choice...but not the only one."

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